BITCOIN – REVOLUTIONARY INNOVATION OR A SPECULATIVE BUBBLE?

BITCOIN – REVOLUTIONARY INNOVATION OR A SPECULATIVE BUBBLE?

By Al August, freelance consultant, for Cryptotrades ltd

Since its inception and launch in 2009, the market value of the Bitcoin has exploded by thousands of percent. In 2017 alone, the world watched by as the value of Bitcoin exceeded valuations upwards of $5,000. However, while many see it as the currency of the future about to revolutionize the way we live, transact and purchase, the extreme volatility in Bitcoin rates brands it as a high-risk, high return asset for speculative investment.

 

The red pill of Bitcoin
The red pill of Bitcoin

Risk begets risk

Bitcoin speculative trading is a very high-risk game as often the value of the currency may fluctuate hundreds of dollars up and down during a single trading day. Even experienced traders, calm, calculated, and iron-willed, may shed a tear at the end of a trading day only to wake up to blissful ecstasy as the market re-opens in profit.

The volatility of recently born assets is primarily the direct result of the volume of trade. The total value of all Bitcoins currently in circulation is estimated at US$70 billion while the daily trading volume does not exceed a few billion dollars. As such, any significant transaction causes large fluctuations in the value of the currency. For the sake of comparison, the volume of daily trading in the global foreign exchange market is estimated at US$5 trillion. Simply put, the more actors participate in any given market, the less influence a single action by one of them will have on the rest.

Further to the above, institutional investors are still reluctant if not outright resistant to take any significant stakes by investing directly in the digital currency. The expressed concerns are mainly due to the safety level of the Bitcoin exchanges themselves. In 2010, Bitcoinica was breached, and 418,547 coins were stolen from investors. In 2014, it was the turn of the TASE. Mt. GOX, at the time the world’s largest and most important exchange, fell victim to a hacking breach which managed to rob 850,000 Bitcoin.

Beyond these examples, and more recently, high ranking officials from banking institutions such as JP Morgan called the cryptocurrency “stupid” and “a fraud” thus incurring a huge decline in market value which had since recuperated fully, even exceeding its previous value. One is left to wonder whether the banks are truly concerned for the economy and world citizenry or perhaps they are naturally inclined to push back such a potentially un-regulating financial instrument, leading the prevalent system of centralized banks, financial “warfare” and direct currency manipulation by way of the dodo.

Mankind’s journey from shells to bills

During mankind interaction over the ages, the use of money had undergone several major revolutions; the transition from prehistoric bartering, the shift toward representative forms of money such as the exchange of beads, shells or grains, and relatively more recently, the issuance of coins from precious metals such as gold and copper, until finally, the appearance of FIAT money as paper bills and the abolition of the “gold standard” in the 1970s.

Each of these evolutionary cycles had completely uprooted the established forms of trade between different peoples, nations, within city-states and throughout whole empires.

Nowadays, a growing number of people adhere to the belief that we are on the verge of witnessing the augurs for the next game-changing revolution in monetary machinations – the Bitcoin revolution.

 

 

Even today many tech works are vicariously paid in coffee and cookies whether they know it or not
Even today many tech works are vicariously paid in coffee and cookies whether they know it or not

The next big thing coming out of nowhere

Bitcoin is a digital currency claimed to have been developed in November 2008 by a shadowy, possibly fictitious, character known only as Satoshi Nakamoto. Satoshi singlehandedly coded Bitcoin’s original mathematical algorithms. The encrypted and anonymized infrastructure, more commonly referred to as “blockchain” technology, and which is required for the “production” of Bitcoins is at the root of his conception.

Claiming that his wish was to create an innovative digital coin, that would be completely independent of central banking systems, and therefore not subject to manipulations such as the printing of money and other arbitrary interventions used to influence currency rates by central banks and governmental entities, Satoshi took it upon himself to release the open-source code online for the benefit of all mankind in 2009.

Speak English, please!

    1. What is it exactly? How is it different from standard money?

      Unlike regular currencies, such as the US Dollar (USD), the Pound Sterling (GBP), the Renminbi (RMB: CNY), the Yen (JPY), and the Euro (EUR), Bitcoin (BTC) is a completely independent currency. It does not depend on any country, intermediary or central governing body. It is not issued by anyone banking system but directly verified and executed by the peer-to-peer transaction network upon which it is based (i.e., transaction take place directly between users).

    2. Where is it coming from? Does money grow on trees now?

      Bitcoins are produced, or more accurately awarded, by a process called “mining,” a record-keeping service done using computer processors. Bitcoin’s inventor Nakamoto based his proof-of-concept on the coin’s artificial scarcity as by design there would only ever be 21 million Bitcoins in existence.

    3. What’s the point?

      Bitcoins can be exchanged for other currencies, services, products just like with “real” money. Therefore, Bitcoin is just as valid a form of investment as, for instance, speculating on the EUR/USD or the price of Gold after a major financial event. However, free from big banks and government interference – it is considered a more “clean” market.

      You may have noticed that recent public comments by a superior person of influence, such as the director of JP Morgan or an announcement from the Central Bank of China, has an almost immediate effect on the valuation of Bitcoin. On the other hand, market corrections occur on an organic timescale, and as we’ve seen recently, the value of Bitcoin recuperates and seems to be on a steady incline upward. Some expert predictions claim that Bitcoin may even reach $10,000 value by the end of 2018. Good luck waiting for the Gold and Oil indices to offer such excitement! Be on the lookout for the first major asteroid mining expedition uncovering “space gold” (but that is a different matter altogether!)

    4. Do I have to purchase Bitcoin to trade on its value?

      Usually, yes, however, this year has seen the rise of cryptocurrency trading platforms which enable trading based on Bitcoin, Ether (Ethereum), Litecoin and other digital currencies’ rates. These new trading companies typically accept wire transfers, online payment transactions and secure credit card transfers which are then traded at the value of Bitcoin versus regular bank-issued currencies such as BTC/USD. In some more exotic cases, a trading platform might even allow trading the difference of Bitcoin rate versus a Major Stock, Future or Index.

      The more common way to purchase Bitcoin is quite simple and is usually the preferred funding option with brokers. Using a digital “wallet” to “store” Bitcoins for its owner in complete anonymity (more on that below). Since Bitcoins are not traded or stored in the traditional sense, a more accurate description of a Bitcoin wallet’s function is to maintain the digital credentials for its user’s Bitcoin holdings. Unlike bank transfers, the transfer of Bitcoin from wallet to wallet is almost immediate and does not involve a significant commission. All transactions are anonymously recorded and encrypted by a string of digits and letters in digital transaction ledgers, which are distributed between the nodes of the blockchain.

 

Bad actors, acting badly

Any new market is often just as rife with fraudulent exploits
Any new market is often just as rife with fraudulent exploits

Due to the anonymous essence of digital currency, conducted without supervision, undisclosed to legal authorities, and mostly unregulated, at its early years and even today, Bitcoin had been exploited by criminals for arms dealing, drugs, stolen goods and unlawful pornography.

However, today, an increasing number of small to medium-sized businesses and service providers, from pubs, food chains to ATMs, are starting to accept payments in Bitcoin as leading corporations such as Microsoft and Amazon are leading the way in embracing the new form of currency. In light of this trend, an ever-growing group of leading figures in the financial sector, global think tanks, as well as Silicon Valley are shifting toward accepting the more established crypto currencies as the true currency of the future.

“Crypto” stands for encrypted or cryptographic, and is intended to convey the security and anonymity behind blockchain-based monetary transactions).

Attractive speculative property, a gambit on the future

By late 2015, Bitcoin’s big bang had begun as the value of the digital currency was rising by tens of percentage points on each passing month
“By late 2015, Bitcoin’s big bang had begun as the value of the digital currency was rising by tens of percentage points on each passing month.”

An opportunity looms ahead and not just for time-traveling doctors. Have a look with us at the mind-blowing shift of the past 7 years, as some of us deeply regret selling their Bitcoins too soon, while many new millionaires are carefully planning their course ahead. Let’s find out where it might lead us from here.

October 10, 2010,

The value of a single Bitcoin (1 BTC) is about 10 cents. At the time, a modest investment of a hundred-dollar bill ($100) would award your digital wallet with no less than 1,000 Bitcoin coins.

On August 21, 2017,

The value of a single Bitcoin is US$4,276. Those 1,000 Bitcoins in your digital wallet are suddenly worth a whopping US $4,276,000!

The massive gains in the value of Bitcoin led to the proliferation of stock exchanges for trading in Bitcoin, and at the same time a multitude of private speculators, believer, and non-believer alike rushed to profit from its meteoric rise in value. However, although presented in a clear upward trend, the short-term volatility in the amount of Bitcoin saw many such investors lose their investment in the cryptocurrency, whether in criminal theft, dissolution of up-till-then trustworthy exchanges or the depreciation of the digital coin’s value by its very nature as a then-new mostly theoretic coin of purchase.

The luckier few who managed to avoid losses by cleverly navigating such early-on processes of an establishing market became multi-millionaires overnight. Thus, a new “gold rush” is unleashed upon the world.

The bubble universe – answers from a feverish mind

The ultimate question on everyone’s mind is whether Bitcoin is a speculative bubble about to burst, sooner than later, or will the currency manage to assert itself as a viable alternative to FIAT money, becoming an integral part of modern life, whether living side-by-side with “government” money or replacing it entirely. Already now, Ether (by Ethereum) is presenting a counterweight to Bitcoin as dozens more digital coins are sprouting after the rain.

 

in Satoshi we trust?
in Satoshi we trust?

In fact, one of the more curious artefacts of this brave new world is the curious route by which the “blockchain” technology as a concept, in-and-of-itself, is fast becoming an additional path to investment in virtual commodities and exotic decentralized instruments well outside the bounds of the currency world (see our next article on the wonderful world of “ICOs”).

Given time, both lines of prediction might prove correct; Modern money is ultimately an abstract entity solely dependent on the degree of “trust” given to it by its users. For example, as a country experiences hyperinflation, world markets confidence in that country’s currency becomes non-existent thereby incurring a rapid depreciation of its former value ultimately making that same currency, which only months before could afford a loaf of bread or a ticket to the movies, into useless paper (or a collector’s item).
Ultimately, the future of the Bitcoin depends on the level of trust given to it by the financial community and the general public. Bitcoin (BTC), Ether (ETH) and similarly popularized digital coins are arousing public interest while becoming ever more mainstream. My litmus test, as far as these things go, is once I find myself deep in discussion on Bitcoin during an inner-city taxi ride.

Japan is another great example demonstrating how digital currencies are becoming a part of the mainstream. In April 2017, Bitcoin became officially recognized in Japan as a payment method.

Buzzing As of the writing of this article, an unverified yet curious note is that Goldman Sachs is rumored to be preparing a “Bitcoin desk” for trading cryptocurrency. If true, it will put the entire market in a new light as Wall Street gets involved the final stamp of approval from the principal financial players will confirm that digital currencies are here to stay, in one form or another. It is a fact of human history that even the bloodiest revolutions tend, in time, to become the State itself. What was once unthinkable becomes commonplace.

Buzzing

 Getting busy with Bitcoin
Getting busy with Bitcoin

It’s now impossible to ignore the buzz around Bitcoin. What used to be known only to a small number of geeks and technology enthusiasts, is now a household term though still clouded in misconception and lack of knowledge. This too shall pass as digital currencies become more prevalent as an accepted form of payment.
There is still a further road to traverse before we can treat Bitcoin as an internationally recognized currency but compared to 7 years ago we are no very far away from reaching there. As the adoption of cryptocurrencies continues, the value of the more well-known digital coins (BTC, ETH) is expected to increase and stabilize. Online traders and those who wish to invest in Bitcoin for securing their future or reeling in an excellent yield of profit should acknowledge that cryptocurrency is still quite a risky asset and should be traded with an informed approach, guidance and consultation.
No risk, no reward as they say, but I wouldn’t go as far as investing an entire year’s savings into Bitcoin just yet; diversification is still key.

Admittedly, as the writer of these lines, I profess to have invested quite a sum just recently. I would thank you kindly that you do not tell the wife.

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